JPMorgan Chase Bank, N.A. and JPMorgan Ventures Energy collectively agreed to pay a fine of US $225,000 to resolve charges brought by the Commodity Futures Trading Commission that, from at least March 1, 2013, through April 30, 2014, they failed to file accurate large trader reports with the CFTC as required by law, reflecting their reportable positions in physical commodity swaps. The CFTC alleged that, during this time, the entities’ LTRs “routinely contained errors,” and were not submitted at all on two days. According to the CFTC, during the relevant time the firms pro-actively advised the agency of issues with their LTRs and further researched and corrected their LTR reporting systems after staff of the CFTC advised them of potential noncompliance issues on January 2, 2014. The firms also submitted corrected historical LTRs after the CFTC notice. The CFTC alleged that the firms in their incorrect LTRs included the underlying commodity futures equivalent months and currency value strike price in the incorrect data fields; included incorrect futures contract equivalents, commodity units and notional value, or none at all; identified positions to the wrong legal entities; and inaccurately reported counterparty identities. Both JPMorgan entities were provisionally registered as swap dealers during the relevant time.
Compliance Weeds: Since July 2, 2012, swap dealers have been fully obligated to report to the Commodity Futures Trading Commission daily reports of their large positions in physical commodity swaps and swaptions in excess of certain thresholds. These reports must comply with all CFTC technical requirements. (Click here for a general description of the CFTC’s requirements in the publication, “Large Trader Reporting for Physical Commodity Swaps: Division of Market Oversight Guidebook for Part 20 Reports” as of May 31, 2012; click here to access CFTC Rule 20.1 for a definition of “reportable position.”) Previously, the CFTC indicated its intent to vigorously enforce breaches in swap reporting obligations when it sanctioned a major banking institution US $2.5 million for allegedly failing from January 2013 to July 2015 to accurately report all reportable swap transactions (including cancellation of prior swaps) to a swap data repository as soon as practicable after a transaction is executed. (For details, click here to access the article, “Swaps Dealer Agrees to US $2.5 Million Fine to Resolve Charges by CFTC That It Misreported Certain Swap Transactions” in the October 4, 2015 edition of Bridging the Week.)
My View: It appears from the CFTC order related to this matter that JPMorgan Chase Bank and JP Morgan Ventures Energy experienced inadvertent technical breakdowns with their reporting of physical commodity swaps for a little over one year. However, during this time, the firms regularly kept the CFTC apprised of their large trader reporting issues, identified and fixed their systemic problems, and submitted corrected reports after the fact. Although the CFTC acknowledged this exemplary response to a problem, it still determined to commence an enforcement action against the firms, and settle this matter for payment of a $225,000 fine. The CFTC states in its order that “[l]arge trader reporting for physical commodity swaps is essential to the Commission’s ability to conduct effective surveillance of markets in U.S. physical commodity futures and economically equivalent swaps.” Notwithstanding, one wonders whether this enforcement action represents the best deployment of scarce resources given the infancy of the CFTC’s swaps reporting regime, the acknowledged openness of the defendants regarding their reporting problems, and the defendants' subsequent repair of their systemic issues and corrected back-reporting.